The Universities Superannuation Scheme (USS) defined benefit (DB) deficit has increased to £12.9bn over the past year due to the impact of Covid-19, the scheme stated.

The scheme’s deficit increased by £7.5bn over the year, from £5.4bn as at 31 March 2019, as assets fell by £0.9bn and liabilities rose by £6.6bn.

As of 31 March 2020, total assets under management for the scheme were £67.6bn, down from £68.4bn in 2019, with DB assets totalling £66.5bn and defined contribution (DC) assets totalling £1.1bn.

The scheme attributed the “sharp rise” in the funding deficit to the impact of Covid-19, stating that market conditions at the reporting date had a “significant impact” on the price of the scheme’s DB pension promises and that “enduring low interest rates” had further impacted the deficit.

However, the scheme reported strong long-term investment returns for the DB fund, with an average of 6.19 per cent per annum over the past five years, equal to £17.4bn and 0.91 per cent per annum above the benchmark.

Over the past year however, the scheme’s default funds, comprising the USS Growth Fund, USS Moderate Growth Fund and USS Cautious Growth Fund, delivered negative absolute and relative performance over the past 12 months, although they did remain
“marginally ahead” of their benchmarks since inception.

The scheme emphasised that the coronavirus pandemic had “profoundly affected global markets” and subsequently “heavily impacted” these funds growth levels.

Furthermore, the ethical funds, cash fund and global equity fund all outperformed their benchmarks in the year, while the Ethical Equity Fund had “particularly strong performance” against its benchmark due to relatively small exposure to the energy sector.

The USS’s latest Financial Management Plan monitoring report also showed that if conditions at the end of June were to be read directly into the 2018’s valuation assumptions, technical provisions would increase to £20.2bn (close gap) as at June 2020, with £74.2bn in assets and £94.4bn in liabilities.

Meanwhile the self-sufficiency deficit would increase to £34.4bn, and the future service cost would be 40.1 per cent of USS payroll.

The scheme clarified however, that these monitoring points are not used to support any decision making, but rather are for information purposes to monitor the overall direction of the scheme.

Furthermore, the scheme will be reviewing all assumptions for the 2020 principles and is expected to use a new valuation methodology, after publishing a discussion paper to sponsoring employers on proposed changes in March.

Speaking to Pensions Age, the scheme confirmed that it will be consulting with Universities UK over September and October for the 2020 valuation and will be proposing a dual discount rate approach.

The scheme previously confirmed that it would proceed with a March 2020 valuation as planned, despite triggering a funding measure breach amid Covid-19-driven market volatility.

USS group chief executive, Bill Galvin, stated: “At 31 March 2020, coronavirus was sweeping across the world and financial markets were hugely uncertain about the potential outcome.

“Our 2020 report outlines the position of the scheme against this challenging backdrop. Five-year investment performance was strong in absolute and relative terms, and we retained our cost advantage versus peers.”

He added: “Even before Covid-19, historically low interest rates, increased life expectancy, greater regulation, and volatile financial markets had already made promises of a set retirement income for life more expensive.

“The depth of the economic shock brought about by the pandemic has highlighted the long-term challenges facing open DB pension schemes like USS; challenges that we intend to work with our stakeholders – Universities UK and University and College Union –to address through the ongoing 2020 valuation.”

The USS reports also confirmed that in February 2020, the scheme started to make allocations in private markets to further diversify the sources of fund returns in the future.

It also stated that it would be looking to create a “number of initiatives” to ensure a more climate-resilient portfolio going forward, including a scheme wide assessment.

This follows the recent USS investment Management announcement that the scheme would be using exclusion powers for the first time for a number of “financially unsuitable” sectors, such as tobacco.

The financial report also highlighted analysis by CEM Benchmarking which revealed that by managing most of its investments in-house, the scheme had saved around £49m per year compared to peers.

However, analysis also revealed that pension administration cost per member for the scheme to had increased by £1 to £72 per member, which the scheme attributed in part, to the acceleration of preparation work for the 2020 valuation.

This is in addition to a 6 per cent increase in overhead spend, up to £160m for the year.

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